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Topic: Dual Momentum Investing (Read 240702 times)

This discussion and the concept of Dual Momentum Investing sparked my interest. If it hasn't been shared already, this Amazon review by yogiyoda (found a link through the Boglehead forums) helped me personally get a more balanced view of DM.

This discussion and the concept of Dual Momentum Investing sparked my interest. If it hasn't been share already, this Amazon review by yogiyoda (found a link through the Boglehead forums) helped me personally get a more balanced view of DM.

YogiYoda from that link did an 800 year backtest (like CFiresim does). Here are some quotes:

-------------------------------------------I ran the 800 year back test methodology on the S&P 500 from 1960 to 2015. That's the most data I had at the time. It had significantly lower returns than buy and hold with very similar volatility. I also ran it for large-cap data from 1927 through 2015, again it had significantly lower returns with similar monthly volatility.--------------------------------------------------------------------------------------The 87 year back test shows that Absolute Momentum performed noticeably worse in the 47 years prior to the book's back test--------------------------------------------------------------------------------------However, your results do make me wonder whether the spectacular results from Dual Momentum in Gary Antonacci's book and on his website might partly be due to him finding, by trial and error, what particular set of rules worked best when back-testing historical data.-------------------------------------------

Those in the thread who are basing your analysis solely on backtesting might want to check your data.

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If you think you know something, find someone who disagrees and listen to them.

Your argument is lost on me here Dodge. I can't even respond because I have no idea what you are attempting to communicate.

I followed Dodge's argument just fine and think it can be summarized as follows: there is a high correlation between the asset allocations people choose and the high historical performance of those asset allocations, and from that correlation you (improperly) concluded that the historical performance caused the choice of allocation. An equally valid explanation would be that a third factor--the underlying cause of the asset allocation's outperformance--also caused people to choose that allocation.

Was my question about the every-7th-Tuesday strategy also lost on you? Because I genuinely believe if you think about that question, you will see the point we've been trying to make.

The unsupported and nonsensical part of Dodges argument is this;

"If you acknowledge the strategies aren't comparable, then it should be clear that your current line of questioning is invalid."

Please translate that into something logical.

The rest is just circular logic as far as I can tell ie. "My post facto justification for believing that x happened is right because my post facto justification is right! Proof you ask? Because X happened. "

Your argument is lost on me here Dodge. I can't even respond because I have no idea what you are attempting to communicate.

I followed Dodge's argument just fine and think it can be summarized as follows: there is a high correlation between the asset allocations people choose and the high historical performance of those asset allocations, and from that correlation you (improperly) concluded that the historical performance caused the choice of allocation. An equally valid explanation would be that a third factor--the underlying cause of the asset allocation's outperformance--also caused people to choose that allocation.

Was my question about the every-7th-Tuesday strategy also lost on you? Because I genuinely believe if you think about that question, you will see the point we've been trying to make.

The unsupported and nonsensical part of Dodges argument is this;

"If you acknowledge the strategies aren't comparable, then it should be clear that your current line of questioning is invalid."

Please translate that into something logical.

The rest is just circular logic as far as I can tell ie. "My post facto justification for believing that x happened is right because my post facto justification is right! Proof you ask? Because X happened. "

I believe I've already answered your other concerns.

Your line of questioning about why people index, as a response to the questions posed to you regarding your active trading strategy, is invalid. The two are so far away from each other, the fact it was even brought up shows an inherent misunderstanding somewhere. Indeed, your misunderstanding of "correlation does not imply causation" highlights this. Judging from your posts, the misunderstanding might stem from your assumptions on why we index.

Logged

If you think you know something, find someone who disagrees and listen to them.

Maybe it's not a convincing story for you. Fair enough. It's obviously very convincing to me. To each his own.

As to the every 7th tuesday question, I can come up with no plausible story for that one, so there's one difference.

The only point we have been trying to make in this entire line of questioning about the logical explanation behind dual momentum is that a logical explanation needs to exist for any investment strategy to be advisable. If that weren't true, it would make just as much sense to follow a 7th-Tuesday approach that happened to backtest well. This seems so self-evident to be beyond argument. Yet we've spent a substantial portion of this thread discussing why we require a logical justification for why DM will continue to work, instead of discussing the merits of the logical justification for why DM will continue to work. Which leads me to conclude either that you didn't understand our point, or that this was all a red herring to avoid discussion of the merits. So, assuming you now understand why there needs to be a logical theory underpinning an investment strategy, can we move the discussion back to the topic at hand?

Essentially; why does DM work? If the answer is I don't know, or I rely on irrational behavior from others as a driver for DM (arguably also an "I don't know"). Then how do you know it will work in the future?

If the answer is I do know... well then what rational logical reason is there for it to work?

I don't think you understand the phrase "catching a falling knife"--it means don't attempt to time the market, and say "oh, momentum is down, so let me buy it" because you'll get cut as it falls further.

My quotes were indicative of why market timing can be a fool's game, even when you're right. They don't indicate that one should "use momentum in the past as a loss-avoidance strategy," as you claim.

I'm not going to argue that you don't understand the phrase, but I certainly do. To argue against buying when momentum is negative is, by definition, a momentum strategy. Trying to perfectly time the bottom is not a momentum strategy.

Please don't put words in my mouth. I'm not arguing against buying when momentum is negative. Or positive. Or trying to time anything at all. I never have.

I advocate for making investments on fundamentals and reason/logic. Momentum has nothing to do with it. Solid investment strategies do.

Sorry, ARS - I'm not trying to ruffle your feathers, and certainly not trying to put words in your mouth. I was just making the point that the whole "catch a falling knife" metaphor is an implicit acceptance of the observation that assets that have been falling recently are likely to continue to fall in the near future, i.e., that they have momentum. If markets are efficient, then "falling knives" shouldn't exist, because a assets are rationally priced at all times - and thus, just as likely to rise as to fall any given point in time - regardless of recent performance.

I'd think investing based on the past--rather than future--would be short sighted, if you actually thought things were predictable.

but to my mind, the issue here is that I believe that recent performance influences what large swaths of other peoples' expectations in the near future. In other words, momentum investing is a bit of a Keynesian beauty contest. You're not trying to decide which asset (or asset class) is the most appealing to you. You're trying to decide which asset will be most appealing to everybody else, at least in the near term.

Maybe it's not a convincing story for you. Fair enough. It's obviously very convincing to me. To each his own.

As to the every 7th tuesday question, I can come up with no plausible story for that one, so there's one difference.

The only point we have been trying to make in this entire line of questioning about the logical explanation behind dual momentum is that a logical explanation needs to exist for any investment strategy to be advisable. If that weren't true, it would make just as much sense to follow a 7th-Tuesday approach that happened to backtest well. This seems so self-evident to be beyond argument. Yet we've spent a substantial portion of this thread discussing why we require a logical justification for why DM will continue to work, instead of discussing the merits of the logical justification for why DM will continue to work. Which leads me to conclude either that you didn't understand our point, or that this was all a red herring to avoid discussion of the merits. So, assuming you now understand why there needs to be a logical theory underpinning an investment strategy, can we move the discussion back to the topic at hand?

Regarding the "Every 7th Tuesday" comparison that keeps getting brought up - I think this is really a bit of a stretch. If backtesting determined that the dual momentum worked fabulously if your lookback period was 183 days, and poorly with a lookback period of 182 or 184 days, then yeah, overfitting would be a logical explanation. The fact that it works well over many different market periods, using many different lookback periods seems to be an indicator of robustness, not overfitting. Just seems like a lazy argument to me. I'm still not sure why "Many investors chase performance" isn't a perfectly sufficient (and succinct) explanation for the existence of momentum.

Again, I say this from the point of view of a lazy buy-and-hold index investor. It just seems to me that this has turned into a bit of a religious argument, with all the deacons of the First Church of the Efficient Market of His Bogliness demanding an excessively detailed explanation of doctrine from the apostates, with the foreknowledge that neither side is interested in changing their minds. YMMV.

On the author's website and in the comments of this review, you will see references to an 87 year back-test, a 212 year study, and an 800 year study. Here are some alternative perspectives on those:

The 87 year back test shows that Absolute Momentum performed noticeably worse in the 47 years prior to the book's back test. Also, by shifting the start date of that test forward by 5 years, the returns and risk adjusted returns look significantly worse for AbsMom ...further proof of the danger of concluding too much from even an 80+ years back-test.

The 212 year study shows that individual stocks show evidence of momentum. However, it also shows that in at least 9 decades momentum underperformed.

I ran the 800 year back test methodology on the S&P 500 from 1960 to 2015. That's the most data I had at the time. It had significantly lower returns than buy and hold with very similar volatility. I also ran it for large-cap data from 1927 through 2015, again it had significantly lower returns with similar monthly volatility.

It often underperforms, and doesn't seem to always exist, in backtesting. So now, without a reasonable story, it's hard to swallow.

As he says in point 9 of the review:

Quote

9.) Momentum is still a mystery and isn't found in all markets or time periods. Will it continue in the assets where you invest? Will increasing technological innovation change its properties or look-back period? Can you stay the course while worrying about this?

I'm not comfortable investing in mysteries, so that's why I'm interested in seeing if this one can be, or has been, solved.

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We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.We (occasionally) blog at AdventuringAlong.com.You can also read my forum "Journal."

Regarding the "Every 7th Tuesday" comparison that keeps getting brought up - I think this is really a bit of a stretch. If backtesting determined that the dual momentum worked fabulously if your lookback period was 183 days, and poorly with a lookback period of 182 or 184 days, then yeah, overfitting would be a logical explanation. The fact that it works well over many different market periods, using many different lookback periods seems to be an indicator of robustness, not overfitting. Just seems like a lazy argument to me. I'm still not sure why "Many investors chase performance" isn't a perfectly sufficient (and succinct) explanation for the existence of momentum.

Again, I say this from the point of view of a lazy buy-and-hold index investor. It just seems to me that this has turned into a bit of a religious argument, with all the deacons of the First Church of the Efficient Market of His Bogliness demanding an excessively detailed explanation of doctrine from the apostates, with the foreknowledge that neither side is interested in changing their minds. YMMV.

Yes that's the point. It seems to be an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well. If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

Yes that's the point. It seems to be an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well. If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

Exactly. The 7th-Tuesday example was only intended to illustrate why a logical explanation should be required for an investment strategy to be advisable. No-one has said that dual momentum is like a 7th-Tuesday strategy; rather, we've only asked for an explanation of the logical theory that underpins it--in other words, we've asked why it is not like a 7th-Tuesday strategy. And most of the discussion spurred by that question has not been "here's why it's not," but "what's the difference whether it is or not, because the past tells us that it clearly works?"

Like I said earlier (as part of the limited discussion thus far to actually address the merits of the possible theories that have been put forward to explain why dual momentum should continue to work), I think the idea that "human behavior causes people to chase performance" is the most compelling reason articulated so far to believe that a dual momentum strategy will continue to outperform in the future. But like I and Sol and others have already said, I don't think this is a compelling enough argument on which to trade my own dollars. What logical reason is there to believe that people will continue to performance chase in a manner that will allow the precise lookback periods that worked in the past to continue to work in the future?

Again, I'm not asking that question in a rhetorical sense because I'm assuming the answer is "there is none"; I'm asking because there needs to be some plausible answer if this strategy is anything more than an every 7th-Tuesday strategy. This thread, I think, was intended to explore the advisability of the dual momentum strategy. There should be zero reluctance to defend the strategy against potential weaknesses in its logic, but we've barely even made it to that stage, because we've encountered resistance to the need to even answer the question of what that logic is in the first place!

What I have trouble with seeing logically, is how a preset lookback period gives the best info about when a crash or boom is coming or present, and provides that info better than someone trying to actively market time based on whatever data available then (including recent returns). I have seen people bid up assets expecting them to continue to grow beyond rationality. I have seen people fearfully sell out of assets below levels I would be comfortable buying at for long term holding. So I get that psychology plays a huge role, and that there are trends. But we never know when those trends are going to start or stop. And following the trend means you're always underperforming the asset you're about to jump to.

Maybe if you're a really good analyst, you're able to time the market right 60% of the time. Incredibly successful sports bettors average about 55% win rates on even money bets, even in a field with lots of "dumb money" and homers due to its recreational aspect being more important than financial return to many sports gamblers. With a 60% win rate, you still lose to buy-and-hold, according to this analysis saying you need an 80% win rate. http://www.jstor.org/discover/10.2307/4479061?uid=3739616&uid=2&uid=4&uid=3739256&sid=21106200794591

How could a fixed lookback period beat the market 80% of the time? And especially if it doesn't matter whether that period is 3 months, 6 months, 11.5 months, or whatever, in that range of 3-15 months?

And a lot of the market is sophisticated investors who have a lot of inside information. If they work at Merrill Lynch or BofA they know what their clients are doing with their money. They know when the tide is starting to shift. How can we beat them with a formula that reacts to a much more delayed signal?

Good questions forummm. And if it has, which the data shows, how come? That seems really odd, no?

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We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.We (occasionally) blog at AdventuringAlong.com.You can also read my forum "Journal."

Maybe it's not a convincing story for you. Fair enough. It's obviously very convincing to me. To each his own.

As to the every 7th tuesday question, I can come up with no plausible story for that one, so there's one difference.

The only point we have been trying to make in this entire line of questioning about the logical explanation behind dual momentum is that a logical explanation needs to exist for any investment strategy to be advisable. If that weren't true, it would make just as much sense to follow a 7th-Tuesday approach that happened to backtest well. This seems so self-evident to be beyond argument. Yet we've spent a substantial portion of this thread discussing why we require a logical justification for why DM will continue to work, instead of discussing the merits of the logical justification for why DM will continue to work. Which leads me to conclude either that you didn't understand our point, or that this was all a red herring to avoid discussion of the merits. So, assuming you now understand why there needs to be a logical theory underpinning an investment strategy, can we move the discussion back to the topic at hand?

Brooklyn,

I have answered the question in the exact same manner about 15 different times in this thread.

Again if my conception of how the market works does not jibe with yours, fair enough!

I have no problem with you asking for my understanding of why momentum exists, but go back and read the thread. How many times must I type the exact same thing?

On the author's website and in the comments of this review, you will see references to an 87 year back-test, a 212 year study, and an 800 year study. Here are some alternative perspectives on those:

The 87 year back test shows that Absolute Momentum performed noticeably worse in the 47 years prior to the book's back test. Also, by shifting the start date of that test forward by 5 years, the returns and risk adjusted returns look significantly worse for AbsMom ...further proof of the danger of concluding too much from even an 80+ years back-test.

The 212 year study shows that individual stocks show evidence of momentum. However, it also shows that in at least 9 decades momentum underperformed.

I ran the 800 year back test methodology on the S&P 500 from 1960 to 2015. That's the most data I had at the time. It had significantly lower returns than buy and hold with very similar volatility. I also ran it for large-cap data from 1927 through 2015, again it had significantly lower returns with similar monthly volatility.

It often underperforms, and doesn't seem to always exist, in backtesting. So now, without a reasonable story, it's hard to swallow.

As he says in point 9 of the review:

Quote

9.) Momentum is still a mystery and isn't found in all markets or time periods. Will it continue in the assets where you invest? Will increasing technological innovation change its properties or look-back period? Can you stay the course while worrying about this?

I'm not comfortable investing in mysteries, so that's why I'm interested in seeing if this one can be, or has been, solved.

ARS,

Please define "a reasonable story." The only conclusion I can draw from your comments is that "a reasonable story," is one that you agree with.

I don't mean that in an accusatory fashion, I just have no idea how you define "reasonable."

A behavioral explanation that stems from a scientifically validated observation on how human beings actually make decisions, would seem to pass the reasonableness test.

Maybe it's not a convincing story for you. Fair enough. It's obviously very convincing to me. To each his own.

As to the every 7th tuesday question, I can come up with no plausible story for that one, so there's one difference.

The only point we have been trying to make in this entire line of questioning about the logical explanation behind dual momentum is that a logical explanation needs to exist for any investment strategy to be advisable. If that weren't true, it would make just as much sense to follow a 7th-Tuesday approach that happened to backtest well. This seems so self-evident to be beyond argument. Yet we've spent a substantial portion of this thread discussing why we require a logical justification for why DM will continue to work, instead of discussing the merits of the logical justification for why DM will continue to work. Which leads me to conclude either that you didn't understand our point, or that this was all a red herring to avoid discussion of the merits. So, assuming you now understand why there needs to be a logical theory underpinning an investment strategy, can we move the discussion back to the topic at hand?

Brooklyn,

I have answered the question in the exact same manner about 15 different times in this thread.

Again if my conception of how the market works does not jibe with yours, fair enough!

I have no problem with you asking for my understanding of why momentum exists, but go back and read the thread. How many times must I type the exact same thing?

AZ

If multiple people are saying the same thing about what you're saying (or not), and repeating it, perhaps it might be time to consider that maybe the communication issue is not solely on their end.

A behavioral explanation that stems from a scientifically validated observation on how human beings actually make decisions, would seem to pass the reasonableness test.

How about any sort of story, beyond a super vague "people sometimes are irrational and we can exploit that"?

I'd love "A behavioral explanation that stems from a scientifically validated observation on how human beings actually make decisions, would seem to pass the reasonableness test." -- Please post said explanation.

Also you ignored the whole rest of that post to nitpick on one point. It really seems like you don't want to talk about the merits of DM, and just want to shift the debate to whatever other things (other strategies, etc.) you can. =/

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We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.We (occasionally) blog at AdventuringAlong.com.You can also read my forum "Journal."

Regarding the "Every 7th Tuesday" comparison that keeps getting brought up - I think this is really a bit of a stretch. If backtesting determined that the dual momentum worked fabulously if your lookback period was 183 days, and poorly with a lookback period of 182 or 184 days, then yeah, overfitting would be a logical explanation. The fact that it works well over many different market periods, using many different lookback periods seems to be an indicator of robustness, not overfitting. Just seems like a lazy argument to me. I'm still not sure why "Many investors chase performance" isn't a perfectly sufficient (and succinct) explanation for the existence of momentum.

Again, I say this from the point of view of a lazy buy-and-hold index investor. It just seems to me that this has turned into a bit of a religious argument, with all the deacons of the First Church of the Efficient Market of His Bogliness demanding an excessively detailed explanation of doctrine from the apostates, with the foreknowledge that neither side is interested in changing their minds. YMMV.

Yes that's the point. It seems to be an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well. If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

You are misusing the term "robustness."

Robustness means...

"A characteristic describing a model's, test's or system's ability to effectively perform while its variables or assumptions are altered. A robust concept can operate without failure under a variety of conditions."

If an theory provides reproducible results in myriad out of sample and out of period tests, it does not "seem" robust, it is robust.

Regarding the "Every 7th Tuesday" comparison that keeps getting brought up - I think this is really a bit of a stretch. If backtesting determined that the dual momentum worked fabulously if your lookback period was 183 days, and poorly with a lookback period of 182 or 184 days, then yeah, overfitting would be a logical explanation. The fact that it works well over many different market periods, using many different lookback periods seems to be an indicator of robustness, not overfitting. Just seems like a lazy argument to me. I'm still not sure why "Many investors chase performance" isn't a perfectly sufficient (and succinct) explanation for the existence of momentum.

Again, I say this from the point of view of a lazy buy-and-hold index investor. It just seems to me that this has turned into a bit of a religious argument, with all the deacons of the First Church of the Efficient Market of His Bogliness demanding an excessively detailed explanation of doctrine from the apostates, with the foreknowledge that neither side is interested in changing their minds. YMMV.

Yes that's the point. It seems to be an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well. If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

You are misusing the term "robustness."

Robustness means...

"A characteristic describing a model's, test's or system's ability to effectively perform while its variables or assumptions are altered. A robust concept can operate without failure under a variety of conditions."

If an theory provides reproducible results in myriad out of sample and out of period tests, it does not "seem" robust, it is robust.

This is an example of a * wasted, pointless post. Take the word "seems" out of his post, if you want. To nitpick that he said it "seems robust" instead of "it is robust" and paste in a definition of robust is the definition of pedantic.

Drop that ONE word (seems), instead of nitpicking on it and address the darn question, which is "why"?

I'm having trouble believing you're acting in good faith at this point, and not just trolling. Picking out small things to annoy, and ignoring actual issues is classic trolling.

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We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.We (occasionally) blog at AdventuringAlong.com.You can also read my forum "Journal."

Maybe it's not a convincing story for you. Fair enough. It's obviously very convincing to me. To each his own.

As to the every 7th tuesday question, I can come up with no plausible story for that one, so there's one difference.

The only point we have been trying to make in this entire line of questioning about the logical explanation behind dual momentum is that a logical explanation needs to exist for any investment strategy to be advisable. If that weren't true, it would make just as much sense to follow a 7th-Tuesday approach that happened to backtest well. This seems so self-evident to be beyond argument. Yet we've spent a substantial portion of this thread discussing why we require a logical justification for why DM will continue to work, instead of discussing the merits of the logical justification for why DM will continue to work. Which leads me to conclude either that you didn't understand our point, or that this was all a red herring to avoid discussion of the merits. So, assuming you now understand why there needs to be a logical theory underpinning an investment strategy, can we move the discussion back to the topic at hand?

Brooklyn,

I have answered the question in the exact same manner about 15 different times in this thread.

Again if my conception of how the market works does not jibe with yours, fair enough!

I have no problem with you asking for my understanding of why momentum exists, but go back and read the thread. How many times must I type the exact same thing?

AZ

If multiple people are saying the same thing about what you're saying (or not), and repeating it, perhaps it might be time to consider that maybe the communication issue is not solely on their end.

A behavioral explanation that stems from a scientifically validated observation on how human beings actually make decisions, would seem to pass the reasonableness test.

How about any sort of story, beyond a super vague "people sometimes are irrational and we can exploit that"?

I'd love "A behavioral explanation that stems from a scientifically validated observation on how human beings actually make decisions, would seem to pass the reasonableness test." -- Please post said explanation.

Also you ignored the whole rest of that post to nitpick on one point. It really seems like you don't want to talk about the merits of DM, and just want to shift the debate to whatever other things (other strategies, etc.) you can. =/

Not really a credible answer ARS.

You are saying any answer but the one I have provided.

If you haven't already, you should familiarize yourself with the work of Tversky and Kahneman, which I have referenced above. It will provide you with detailed scientifically validated (even Nobel prize winning) understanding for why human beings chase performance and are likely to do so in the future.

Your underlying assumption seems to be that a rational theory is one modelled upon a market which is made up of perfectly rational actors who make decisions based on risk. To me this is the most unrealistic assumption of all.

No, I'm saying any answer. You have not provided a reasonable explanation, just a vague hand-waiving.

Let me put it another way: You think you ave provided an answer.

A bunch of us are still asking for one.

So whatever you think you have provided did not come through clear enough.

Try again please?

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We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.We (occasionally) blog at AdventuringAlong.com.You can also read my forum "Journal."

Regarding the "Every 7th Tuesday" comparison that keeps getting brought up - I think this is really a bit of a stretch. If backtesting determined that the dual momentum worked fabulously if your lookback period was 183 days, and poorly with a lookback period of 182 or 184 days, then yeah, overfitting would be a logical explanation. The fact that it works well over many different market periods, using many different lookback periods seems to be an indicator of robustness, not overfitting. Just seems like a lazy argument to me. I'm still not sure why "Many investors chase performance" isn't a perfectly sufficient (and succinct) explanation for the existence of momentum.

Again, I say this from the point of view of a lazy buy-and-hold index investor. It just seems to me that this has turned into a bit of a religious argument, with all the deacons of the First Church of the Efficient Market of His Bogliness demanding an excessively detailed explanation of doctrine from the apostates, with the foreknowledge that neither side is interested in changing their minds. YMMV.

Yes that's the point. It seems to be an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well. If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

You are misusing the term "robustness."

Robustness means...

"A characteristic describing a model's, test's or system's ability to effectively perform while its variables or assumptions are altered. A robust concept can operate without failure under a variety of conditions."

If an theory provides reproducible results in myriad out of sample and out of period tests, it does not "seem" robust, it is robust.

This is an example of a * wasted, pointless post. Take the word "seems" out of his post, if you want. To nitpick that he said it "seems robust" instead of "it is robust" and paste in a definition of robust is the definition of pedantic.

Drop that ONE word (seems), instead of nitpicking on it and address the darn question, which is "why"?

I'm having trouble believing you're acting in good faith at this point, and not just trolling. Picking out small things to annoy, and ignoring actual issues is classic trolling.

Not trolling at all. In the post referenced the claim was that momentum "seems" robust because it has reproducible results.

If the use of the term "robust" betrays a clear lack of understanding of what "robust" means, then the only way that we can proceed is if we correctly define our terms.

This is exactly what occurred earlier in the thread when you correctly defined the term "A priori" for me.

Regarding the "Every 7th Tuesday" comparison that keeps getting brought up - I think this is really a bit of a stretch. If backtesting determined that the dual momentum worked fabulously if your lookback period was 183 days, and poorly with a lookback period of 182 or 184 days, then yeah, overfitting would be a logical explanation. The fact that it works well over many different market periods, using many different lookback periods seems to be an indicator of robustness, not overfitting. Just seems like a lazy argument to me. I'm still not sure why "Many investors chase performance" isn't a perfectly sufficient (and succinct) explanation for the existence of momentum.

Again, I say this from the point of view of a lazy buy-and-hold index investor. It just seems to me that this has turned into a bit of a religious argument, with all the deacons of the First Church of the Efficient Market of His Bogliness demanding an excessively detailed explanation of doctrine from the apostates, with the foreknowledge that neither side is interested in changing their minds. YMMV.

Yes that's the point. It seems to be an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well. If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

You are misusing the term "robustness."

Robustness means...

"A characteristic describing a model's, test's or system's ability to effectively perform while its variables or assumptions are altered. A robust concept can operate without failure under a variety of conditions."

If an theory provides reproducible results in myriad out of sample and out of period tests, it does not "seem" robust, it is robust.

So basically nothing can ever falsely appear robust? So if I go back and find out that trading on every 7th tuesday provided fantastic market beating returns, you would claim that is a robust investment strategy? It appears to be robust through back testing, ipso facto it is robust, despite having no logical reason for why it works?

I'm gonna have to disagree with you here. I'm not even one who used robustness, that was mississippi mudstache, I was just pointing out that I disagree that the theory is robust. I think it's possibly giving you false confidence that it is robust when it is in fact not, ie it seems robust.

FrugalNacho's post aside, I'll even grant you it's robust so we can move on to a response:It seems to be is an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well. If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

Response?

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If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

I do believe in the theory that "every 7th tuesday" is the time to buy. I also believe it is a robust theory, e.g. it also works for other days of the week and for different frequencies - even irregular ones.

I have answered the question in the exact same manner about 15 different times in this thread.

Again if my conception of how the market works does not jibe with yours, fair enough!

I have no problem with you asking for my understanding of why momentum exists, but go back and read the thread. How many times must I type the exact same thing?

By my count, you have answered the question "why should we expect dual momentum to continue to outperform in the future" exactly five times, each of which has been a vague, barely responsive answer along the lines of "the reason has something to do with humans' tendency to chase performance."

Here is the full text of the portion of each your posts which I consider responsive to the question asked:

There are multiple explanations for momentum. Some efficient market types even try to explain it as a risk story which has never made a bit of sense to me and just ends up seeming Panglossian.

I don't think that momentum has to do with human irrationality or stupidity, in a pejorative way. I think it has to do with the heuristics that govern human decision-making. i'm talking recency, loss aversion, representativeness, etc. i.e. everything in Daniel Kahneman's thinking fast and slow. These are useful techniques that we all use to process information quickly, but they are nonstatistical ways of thinking.

There is also some good data that momentum is perpetuated by the flow of capital in and out of funds. So as one strategy becomes successful based on regime change, money flows toward it in the short-term from other funds creating price momentum (and negative momentum from the donor funds!). And because money cannot flow instantaneously because of liquidity issues, this momentum lasts for a significant amount of time (anywhere from 3 to 12 months).

To me momentum is an expression of humanity as it exists, not as we think it exists.

We all believe ourselves to be rational, but we have irrational reactions to loss, and to prospective gain. We all chase performance (which is probably why there is such a strong predilection here for passive low cost investment. It is the SmartMoney bet!)

Representativeness. (Our need to attribute causality to that which reinforces our own non statistical biases. ( this stock made a killing for me, proving I'm smart, which again makes me attached to its ongoing performance which makes it hard for me to sell it. ))

Which are all subtle aspects in our cognitive make up which make it hard to buy recent losers and easy to buy recent winners.

And when you get to the institutional level, the effects are only amplified. Money flows towards recent winners, because if you are paying someone 2 and 20 to outperform the market they had better have proof of their recent outperformance.

I recognized this tendency in myself even when it came time to rebalance my buy and hold portfolio.

It is non statistical, and illogical, and powerful, and it shades almost every trade that people make, which in combination makes price momentum. A tendency for recent price movement to be perpetuated.

It could be that I am exceptionally illogical or greedy or non statistical in my thinking, who knows?

But that's how I see the market. (At least after having become aware of the momentum effect.)

Performance chasing!

Beyond these vague descriptions that some rationale exists, and that it has something to do with human behavior and cognitive biases, you have not even bothered to attempt to answer the question. Instead, you keep avoiding the question, and launching into arguments about why we should not even look for logical rationales in the first place (which I find absurd), or about the logical rationales that underpin alternative investment strategies (like passive indexing), or whether logical rationales are in fact what drive investors to adopt strategies like passive indexing--all of which is irrelevant to the topic at hand.

Hodedofme, who has clearly understood the question being asked, provided some better answers, which we went on to discuss, in the manner a forum is supposed to operate.

If you don't have any better explanations than what you stated above, just say so. That's fine. But stop ducking the question, or, worse yet, arguing that it is unfair for us to ask the most basic question that should be asked of any investment strategy: why should we believe that it will continue to work?

FrugalNacho's post aside, I'll even grant you it's robust so we can move on to a response:It seems to be is an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well. If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

Response?

I have told you why I think it is robust.

Because humans have a fundamental tendency to chase performance (based on the above mentioned rigorously described and validated behavioral biases and heuristics) and this causes price momentum.

I can explain momentum satisfactorily for myself,but obviously not for you.

Admittedly If momentum didn't work I would not deploy the strategy, regardless of the elegance of the underlying theory. But it does work, and it works pervasively and persistently.

Let me turn that question around for you though.

If stocks had underperformed treasuries for the last 800 years, do you really think that you would be 100% equities, because of your convincing story?

So whatever you think you have provided did not come through clear enough.

For the record, mdmd's answer(s) (as collected by brooklynguy) pass the "reasonable" standard for me. The last 50 posts of "give us more of an answer than that!" have left me befuddled, since that's not really a way to carry on a discussion. Normally the discussion would proceed by pointing out why you *disagree* with that answer, not just continually saying "that answer wasn't really an answer". So I guess put me in the Mississippi Mudstache category on this one.

So whatever you think you have provided did not come through clear enough.

For the record, mdmd's answer(s) (as collected by brooklynguy) pass the "reasonable" standard for me. The last 50 posts of "give us more of an answer than that!" have left me befuddled, since that's not really a way to carry on a discussion. Normally the discussion would proceed by pointing out why you *disagree* with that answer, not just continually saying "that answer wasn't really an answer". So I guess put me in the Mississippi Mudstache category on this one.

Fair enough. I don't understand the answer well enough (it's way too vague) to actually be able to point out why I disagree with it (if I do).

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So whatever you think you have provided did not come through clear enough.

For the record, mdmd's answer(s) (as collected by brooklynguy) pass the "reasonable" standard for me. The last 50 posts of "give us more of an answer than that!" have left me befuddled, since that's not really a way to carry on a discussion. Normally the discussion would proceed by pointing out why you *disagree* with that answer, not just continually saying "that answer wasn't really an answer". So I guess put me in the Mississippi Mudstache category on this one.

Thank you for this.

I (now) feel that I am (perhaps) not a character in Kafka's The Trial.

The last 50 posts of "give us more of an answer than that!" have left me befuddled, since that's not really a way to carry on a discussion. Normally the discussion would proceed by pointing out why you *disagree* with that answer, not just continually saying "that answer wasn't really an answer".

Fair enough, but I think the gears of normal discussion stopped turning because those collected answers had to be forcibly extracted during the larger back-and-forth of irrelevant side debates that constituted the bulk of the discussion in this thread (and which do not appear in the neat collection of responsive answers).

I don't understand the answer well enough (it's way too vague) to actually be able to point out why I disagree with it (if I do).

This is the issue I still have. The reason that we should expect dual momentum to persist in a way that will allow that strategy (using the lookback period(s) that have been specified) to outperform the market, has not been articulated in a way that I can understand well enough to respond to, or to know whether I agree or disagree.

I don't understand the answer well enough (it's way too vague) to actually be able to point out why I disagree with it (if I do).

This is the issue I still have. The reason that we should expect dual momentum to persist in a way that will allow that strategy (using the lookback period(s) that have been specified) to outperform the market, has not been articulated in a way that I can understand well enough to respond to, or to know whether I agree or disagree.

Exactly. Skyrefuge, if you understand it, maybe you can give us a coherent explanation of why it works and will continue to do so. :)

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We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.We (occasionally) blog at AdventuringAlong.com.You can also read my forum "Journal."

The last 50 posts of "give us more of an answer than that!" have left me befuddled, since that's not really a way to carry on a discussion. Normally the discussion would proceed by pointing out why you *disagree* with that answer, not just continually saying "that answer wasn't really an answer".

Fair enough, but I think the gears of normal discussion stopped turning because those collected answers had to be forcibly extracted during the larger back-and-forth of irrelevant side debates that constituted the bulk of the discussion in this thread (and which do not appear in the neat collection of responsive answers).

I don't understand the answer well enough (it's way too vague) to actually be able to point out why I disagree with it (if I do).

This is the issue I still have. The reason that we should expect dual momentum to persist in a way that will allow that strategy (using the lookback period(s) that have been specified) to outperform the market, has not been articulated in a way that I can understand well enough to respond to, or to know whether I agree or disagree.

There are 2 questions thatyou must answer for yourself to understand whether or not dual momentum will continue to work in the future.

1. Will simple trendfollowing approaches continue to reproducibly mitigate drawdowns in the future?

And

Will the momentum effect persist into the future?

You know my answers already, and they are unconvincing to you. But here is how I have answered those questions

1. Yes, because of structural factors in the economy which create reproducible durations of bear markets, trend following will continue to identify bear markets in the future, which will mitigate drawdowns.

And

2. Yes, and it is a behavioral story not a risk story. Humans will continue to chase performance. This performance chasing behavior is fundamental to the way we make decisions, and human decision making is what drives markets.

(Kahneman's Thinking fast and slow, was very instrumental in me reaching this conclusion. It's a wonderful book and highly recommended)

Note that I make no claims about "beating the market."

Whipsaws can happen randomly, and big flash crashes with rapid recoveries are very problematic for trendfollowing approaches.

In my view the probability of numerous more bear markets in my lifetime is greater than the probability of numerous black Monday's, but that is just an educated guess based on base rate probability.

Beating the market is not really the point, but if it does, all the better.

This discussion and the concept of Dual Momentum Investing sparked my interest. If it hasn't been share already, this Amazon review by yogiyoda (found a link through the Boglehead forums) helped me personally get a more balanced view of DM.

YogiYoda from that link did an 800 year backtest (like CFiresim does). Here are some quotes:

-------------------------------------------I ran the 800 year back test methodology on the S&P 500 from 1960 to 2015. That's the most data I had at the time. It had significantly lower returns than buy and hold with very similar volatility. I also ran it for large-cap data from 1927 through 2015, again it had significantly lower returns with similar monthly volatility.--------------------------------------------------------------------------------------The 87 year back test shows that Absolute Momentum performed noticeably worse in the 47 years prior to the book's back test--------------------------------------------------------------------------------------However, your results do make me wonder whether the spectacular results from Dual Momentum in Gary Antonacci's book and on his website might partly be due to him finding, by trial and error, what particular set of rules worked best when back-testing historical data.-------------------------------------------

Those in the thread who are basing your analysis solely on backtesting might want to check your data.

Do the proponents of this strategy have any comments on the above data?

Regarding the "performance chasing" theory, it's the same old story we've all seen for a thousand similar breakout/market-timing/trend...etc, strategies.

-------------------------------------"The market is made up of humans, and by human nature we are afraid of loss performance chase. This irrational behavior isn't based on fundamentals and won't last, therefore you should buy when the market looks GREAT and goes up to X!"

"The market is made up of humans, and by human nature we are afraid of loss performance chase. This irrational behavior isn't based on fundamentals and won't last, therefore you should sell when the market looks GREAT and moves up to X!"-------------------------------------

With X being the same value each time. Since the same "performance chasing" analysis can reasonably lead you in both directions, the only way to know which direction to apply it, is by backtesting. If you backtest and see that the majority of the time it goes up at X, then you go with the first story. If you backtest and see that the majority of the time it goes down at X, then you go with the second story. With this line of thinking, the "performance chasing" justification is meaningless, as it will blindly follow the result of the backtest. This is why you're meeting so much resistance with this type of answer. It's an implicit admission that your entire strategy to beat the market is solely reliant on the results of a backtest.

Which leads me back to Brooklynguy's comment:-------------------------------------If you use backtesting alone, you have proven nothing more than the fact that the strategy has worked in the past. It is textbook survivorship bias to draw a conclusion solely from backtesting, because you are ignoring the infinite number of conceivable and backtestable strategies that failed to work in the past. If you backtest enough strategies, you are bound to find one that worked through random chance alone.-------------------------------------

Regarding the "Every 7th Tuesday" comparison that keeps getting brought up - I think this is really a bit of a stretch. If backtesting determined that the dual momentum worked fabulously if your lookback period was 183 days, and poorly with a lookback period of 182 or 184 days, then yeah, overfitting would be a logical explanation. The fact that it works well over many different market periods, using many different lookback periods seems to be an indicator of robustness, not overfitting. Just seems like a lazy argument to me. I'm still not sure why "Many investors chase performance" isn't a perfectly sufficient (and succinct) explanation for the existence of momentum.

Again, I say this from the point of view of a lazy buy-and-hold index investor. It just seems to me that this has turned into a bit of a religious argument, with all the deacons of the First Church of the Efficient Market of His Bogliness demanding an excessively detailed explanation of doctrine from the apostates, with the foreknowledge that neither side is interested in changing their minds. YMMV.

Yes that's the point. It seems to be an indicator of robustness, but why? What is it exactly that is giving that edge, or is it simply coincidence? If this theory didn't back test well, you would move on to another theory, and eventually you will find a theory that back tests phenomenally well. If that was the "every 7th tuesday" rule, would you follow that investment strategy without any logical explanation for why it worked so well?

You are misusing the term "robustness."

Robustness means...

"A characteristic describing a model's, test's or system's ability to effectively perform while its variables or assumptions are altered. A robust concept can operate without failure under a variety of conditions."

If an theory provides reproducible results in myriad out of sample and out of period tests, it does not "seem" robust, it is robust.

So basically nothing can ever falsely appear robust? So if I go back and find out that trading on every 7th tuesday provided fantastic market beating returns, you would claim that is a robust investment strategy? It appears to be robust through back testing, ipso facto it is robust, despite having no logical reason for why it works?

I'm gonna have to disagree with you here. I'm not even one who used robustness, that was mississippi mudstache, I was just pointing out that I disagree that the theory is robust. I think it's possibly giving you false confidence that it is robust when it is in fact not, ie it seems robust.

I think what you're asking is: Just because a theory is robust does that prove that it is necessarily true?

And in my opinion the answer is:

No! But the more robust a Theory is, The more likely it is to be true.

My understanding of the relevant parts of miles' answer to the why it should work question is that performance chasers exhibit herd mentality, and a herd mentality tends to amplify market movements that are essentially otherwise random. This is purely a behavioral psychology answer.

I think this theory supports a short term momentum trading strategy, though it says nothing at all about market fundamentals and I think most of us are looking for a fundamentals kind of justification. It also says nothing about long term growth patterns or which companies or sectors are likely to succeed, but how could it? Any strategy that deliberately ignores most of the information about the markets is necessarily going be agnostic about anything other than the single metric it follows.

It looks like the key disconnect here is between one camp that sees the future being born of logic and the other that sees the future being born of history. I can mentally justify both approaches, I guess. I'd like to believe that logic is more predictive than a random past, but I suspect there are enough patterns in history to argue it both ways.

The main belief is that humans (in general) are overly-optimistic when they see something improving, and overly-pessimistic when they see something declining. Hopefully this isn't a shocking statement to anyone? If I was mdmd, after the 2nd or 3rd round of this, I would have actually linked to some research (likely from Kahneman) that explicitly reveals this human failing, but since it's such a baked-in part of Boglehead Investing 101 ("don't be like the masses, who buy high and sell low"), he probably figured a citation wasn't required. And since it's not my argument, I'm not going to look it up either.

If there were no delays or limits on human society's ability and interest to move stock prices, then seeing a 100% rise or fall in a millisecond would not be unexpected. But in fact, the US stock market has never risen or fallen 30% in a one day period. On the other hand, the market has never failed to rise by more than 30% in any 20-year period. These two combined suggest that there is some "stickiness" in the market that causes price movements to be spread out over a time-period longer than "instantaneous".

In my mind, some of this lack-of-instantaneousness comes from the fact that the "information" that drives market prices comes from the real world, and the real world is constrained by the laws of physics, which gives a fundamental speed limit to information, as well as a practical speed limit that's far lower. 100 customers parking, walking into a Best Buy, picking up an iPad, walking to the cashier, and paying eventually results in a "iPads are selling great!" bit of information, but that information is not created instantaneously.

So, unless the laws of physics change, or human behavior (which is likely built into our DNA and brains) changes, it seems reasonable that these non-instantaneous market price changes which we have observed in the past will continue in the future. And if a signal can be found that reliably indicates when a non-instantaneous directional price-movement has started, then that can be exploited for profit above market returns.

The challenge then is finding that signal. mdmd seems to believe it's not that difficult, and (given his belief in a range of lookback periods) does not have to be particularly precise in order to work. I get the impression he would admit that this portion of his system comes solely from backtesting.

But it doesn't have to. You could theoretically create a model that you would use to predict the average duration of a directional price movement. It would use inputs like average speed of delivery trucks, frequency of reporting by publicly-traded companies, duration of Congressional terms, vacation times of stockbrokers, time for a wheat crop to go from seed to harvest, and typing speed of participants posting on Internet investing forums. That way it could define a duration somewhere between the one-day and 20-year periods mentioned earlier, without relying on any backtesting.

That sounds like a giant pain in the ass, so in lieu of such a model, it's not shocking to me if a convincing-looking backtest is used in its stead.

This discussion and the concept of Dual Momentum Investing sparked my interest. If it hasn't been share already, this Amazon review by yogiyoda (found a link through the Boglehead forums) helped me personally get a more balanced view of DM.

YogiYoda from that link did an 800 year backtest (like CFiresim does). Here are some quotes:

-------------------------------------------I ran the 800 year back test methodology on the S&P 500 from 1960 to 2015. That's the most data I had at the time. It had significantly lower returns than buy and hold with very similar volatility. I also ran it for large-cap data from 1927 through 2015, again it had significantly lower returns with similar monthly volatility.--------------------------------------------------------------------------------------The 87 year back test shows that Absolute Momentum performed noticeably worse in the 47 years prior to the book's back test--------------------------------------------------------------------------------------However, your results do make me wonder whether the spectacular results from Dual Momentum in Gary Antonacci's book and on his website might partly be due to him finding, by trial and error, what particular set of rules worked best when back-testing historical data.-------------------------------------------

Those in the thread who are basing your analysis solely on backtesting might want to check your data.

Do the proponents of this strategy have any comments on the above data?

Regarding the "performance chasing" theory, it's the same old story we've all seen for a thousand similar breakout/market-timing/trend...etc, strategies.

-------------------------------------"The market is made up of humans, and by human nature we are afraid of loss performance chase. This irrational behavior isn't based on fundamentals and won't last, therefore you should buy when the market looks GREAT and goes up to X!"

"The market is made up of humans, and by human nature we are afraid of loss performance chase. This irrational behavior isn't based on fundamentals and won't last, therefore you should sell when the market looks GREAT and moves up to X!"-------------------------------------

With X being the same value each time. Since the same "performance chasing" analysis can reasonably lead you in both directions, the only way to know which direction to apply it, is by backtesting. If you backtest and see that the majority of the time it goes up at X, then you go with the first story. If you backtest and see that the majority of the time it goes down at X, then you go with the second story. With this line of thinking, the "performance chasing" justification is meaningless, as it will blindly follow the result of the backtest. This is why you're meeting so much resistance with this type of answer. It's an implicit admission that your entire strategy to beat the market is solely reliant on the results of a backtest.

Which leads me back to Brooklynguy's comment:-------------------------------------If you use backtesting alone, you have proven nothing more than the fact that the strategy has worked in the past. It is textbook survivorship bias to draw a conclusion solely from backtesting, because you are ignoring the infinite number of conceivable and backtestable strategies that failed to work in the past. If you backtest enough strategies, you are bound to find one that worked through random chance alone.-------------------------------------

I'm tempted to say that we should all stop racing to post our latest thoughts and instead take the time to digest (and let others digest) the lengthy posts that just keep coming, each of which requires (and deserves) a significant amount of mental unpacking, but I wouldn't be able to follow my own advice.

It looks like the key disconnect here is between one camp that sees the future being born of logic and the other that sees the future being born of history. I can mentally justify both approaches, I guess. I'd like to believe that logic is more predictive than a random past, but I suspect there are enough patterns in history to argue it both ways.

But, as is now being fleshed out, I think both camps agree that the future is born of logic. We can use history to find patterns that may be predictive of the future, but only if there is some underlying logic to explain the pattern. No-one adopted the view that a 7th-Tuesday-type strategy that happened to backtest perfectly could be expected to be predictive of the future (and therefore be actionable). What's ironic (if ironic is the right word), though, is that the logic behind dual momentum is the human animal's tendency to fail to exercise logical reasoning.

You could theoretically create a model that you would use to predict the average duration of a directional price movement. It would use inputs like average speed of delivery trucks, frequency of reporting by publicly-traded companies, duration of Congressional terms, vacation times of stockbrokers, time for a wheat crop to go from seed to harvest, and typing speed of participants posting on Internet investing forums. That way it could define a duration somewhere between the one-day and 20-year periods mentioned earlier, without relying on any backtesting.

That sounds like a giant pain in the ass, so in lieu of such a model, it's not shocking to me if a convincing-looking backtest is used in its stead.

Ok, but in our rapidly changing world, where the myriad factors you identified (and the nearly infinite number you did not identify) that contribute to the non-instantaneousness of the market's incorporation of price-moving information are not static, why should we expect the same lookback period that worked in the past to continue to work in the future? And, since these factors were not static across history, why did the same lookback period work across all periods in the past (if that is indeed what the data say)?

My understanding of the relevant parts of miles' answer to the why it should work question is that performance chasers exhibit herd mentality, and a herd mentality tends to amplify market movements that are essentially otherwise random. This is purely a behavioral psychology answer.

I think this theory supports a short term momentum trading strategy, though it says nothing at all about market fundamentals and I think most of us are looking for a fundamentals kind of justification. It also says nothing about long term growth patterns or which companies or sectors are likely to succeed, but how could it? Any strategy that deliberately ignores most of the information about the markets is necessarily going be agnostic about anything other than the single metric it follows.

It looks like the key disconnect here is between one camp that sees the future being born of logic and the other that sees the future being born of history. I can mentally justify both approaches, I guess. I'd like to believe that logic is more predictive than a random past, but I suspect there are enough patterns in history to argue it both ways.

I think this is a fair description of the impasse in broad strokes Sol.

Some quibbles with your characterization of my model though.

1. There is no "herd mentality" in my mental model of price momentum, simply a predictable shading of the of a particular probability of decisions being made on an individual level which in aggregate creates price trends. (Not discounting that herd mentality exists, or that it effects momentum, it's just not part of my mental construct.

2. I would define the 2 camps as the "theoretical" vs the "empirical", but would point out that both indexers and DM investors use both theoretical and empirical data to instruct their strategies.

If stocks had underperformed treasuries for the last 800 years, do you really think that you would be 100% equities, because of your convincing story?

If government-guaranteed treasuries promised 20% yearly returns, I'm sure many of us would be 100% treasuries. Shoot, if they promised 7-8%, I'm sure many of us would be 100% treasuries. Indeed, back when interest rates were high, one of the first Extreme Early Retirement books recommended this.

But this is not related to the topic at hand, because it's a question of risk. If 100% treasuries guaranteed a 4%, or even a 6% withdrawal rate, why bother with anything else? Of course, the example is flawed, as if treasuries promised 8% or 20%, the stock market premium would naturally rise to be above that number and inflation would probably be out of control, but that's another topic.

Here are two relevant questions along these lines:

1. If the authors of these books/studies all admitted to a flaw in their calculations, published new books/papers saying they got the Dual Momentum effect completely backwards, and said you should follow the same steps, but BUY when you would normally SELL, and SELL when you would normally BUY, would you still follow the strategy?

2. If instead the authors could go back in time, and correct the mistake before publishing their first books/papers, with all the graphs, charts, and "performance chasing" justification looking exactly the same, do you think you'd still agree with the strategy?

You still have the 200 years of data, but now it says you should do the opposite. If you can admit to yourself that you'd still follow the strategy, then you're agreeing the "performance chasing" justification doesn't matter, and your analysis is solely reliant on the results of a backtest.

« Last Edit: April 29, 2015, 03:56:12 PM by Dodge »

Logged

If you think you know something, find someone who disagrees and listen to them.

What will we know about markets in 500 years? That there was a lot of stuff we thought we knew were true, but we only used 100 years of data. After enough years passed, we realized that it wasn't true after all.

From an old trend following trader I know:

Your system has beaten buy and hold both in risk adjusted temrs and absolute terms by the looks of it! "Has" and "will " are of course very different words.

I am afraid that I increasingly tend to look at the matter as a philosophical one in which, as with so much of our world, definitive answers are not at present (and may never be) possible.

This discussion and the concept of Dual Momentum Investing sparked my interest. If it hasn't been share already, this Amazon review by yogiyoda (found a link through the Boglehead forums) helped me personally get a more balanced view of DM.

YogiYoda from that link did an 800 year backtest (like CFiresim does). Here are some quotes:

-------------------------------------------I ran the 800 year back test methodology on the S&P 500 from 1960 to 2015. That's the most data I had at the time. It had significantly lower returns than buy and hold with very similar volatility. I also ran it for large-cap data from 1927 through 2015, again it had significantly lower returns with similar monthly volatility.--------------------------------------------------------------------------------------The 87 year back test shows that Absolute Momentum performed noticeably worse in the 47 years prior to the book's back test--------------------------------------------------------------------------------------However, your results do make me wonder whether the spectacular results from Dual Momentum in Gary Antonacci's book and on his website might partly be due to him finding, by trial and error, what particular set of rules worked best when back-testing historical data.-------------------------------------------

Those in the thread who are basing your analysis solely on backtesting might want to check your data.

Do the proponents of this strategy have any comments on the above data?

Regarding the "performance chasing" theory, it's the same old story we've all seen for a thousand similar breakout/market-timing/trend...etc, strategies.

-------------------------------------"The market is made up of humans, and by human nature we are afraid of loss performance chase. This irrational behavior isn't based on fundamentals and won't last, therefore you should buy when the market looks GREAT and goes up to X!"

"The market is made up of humans, and by human nature we are afraid of loss performance chase. This irrational behavior isn't based on fundamentals and won't last, therefore you should sell when the market looks GREAT and moves up to X!"-------------------------------------

With X being the same value each time. Since the same "performance chasing" analysis can reasonably lead you in both directions, the only way to know which direction to apply it, is by backtesting. If you backtest and see that the majority of the time it goes up at X, then you go with the first story. If you backtest and see that the majority of the time it goes down at X, then you go with the second story. With this line of thinking, the "performance chasing" justification is meaningless, as it will blindly follow the result of the backtest. This is why you're meeting so much resistance with this type of answer. It's an implicit admission that your entire strategy to beat the market is solely reliant on the results of a backtest.

Which leads me back to Brooklynguy's comment:-------------------------------------If you use backtesting alone, you have proven nothing more than the fact that the strategy has worked in the past. It is textbook survivorship bias to draw a conclusion solely from backtesting, because you are ignoring the infinite number of conceivable and backtestable strategies that failed to work in the past. If you backtest enough strategies, you are bound to find one that worked through random chance alone.-------------------------------------

Dodge, all you had to do was click on the link provided and read the comments to yogiyoda's review...

From Gary himself:

yogiyoda,

Max Henke contacted me and suggested I might want to help clear up your confusion about absolute momentum that led to your alarmist headline. I'm happy to try to do that. First, as I wrote in my last 2 blog posts, I used a 10-month look back there because the public is used to seeing 10-month moving averages, and I wanted to match that time frame. I also wanted to demonstrate that momentum is robust and works well over a range of look back periods. As I pointed out to you by email, the difference in results between 10 and 12-month absolute momentum was negligible over my 87 year back test. During that time, the Sharpe ratio of 10-month absolute momentum applied to the US stock market was .58 with a maximum drawdown of -41%. With 12-month absolute momentum, the Sharpe ratio was .57 with a maximum drawdown of -44%. I think it is misleading when you say that 12-month absolute momentum underperforms. When you look at the buy-and-hold results from holding the U.S. stock market during this time, you can see a Sharpe ratio of .42 and a maximum drawdown of -84%, which are considerably worse than absolute momentum with either look back period. (I also calculated absolute momentum results from 1964 through 2014 to coincide with other data on the French website. Both 10 and 12-month absolute momentum gave exactly the same Sharpe ratio of .50 and maximum drawdown of -24%, compared to a buy-and-hold Sharpe ratio of .38 with a maximum drawdown of -50%). The important point here is that on both a risked-adjusted return basis and a drawdown minimization basis, absolute momentum greatly outperformed buy-and-hold, whatever your time frame. And the further back in time you go, the greater the reduction in maximum drawdown from using absolute momentum.

Your main criticism seems to be that absolute momentum with both a 10 and 12-month look back period adds a potentially large short term risk from whipsaw losses. Your reason for saying this is that there were no such losses during the past 40 years and possibly only one during the past 87 years. Therefore, the risk must be hidden and readers ought to know that.

Just to clarify things, the pre-1940 loss you noticed came from a drop in the market while absolute momentum was still in equities and did not involve a whipsaw loss created by getting out of and then back into stocks at higher prices. In fact, all the losses using absolute momentum came from market performance while absolute momentum was still in equities, and many times subsequent stock market losses were avoided. Overall, you were far better off getting out of stocks with absolute momentum rather than staying in stocks with buy-and-hold. On reason absolute momentum has worked so well is that it is designed to keep you out of bear markets in the first place, and stock market drawdowns greater than 10% are many times more likely to occur in bear markets than in bull markets.

Ironically, the large whipsaw losses you fear could have occurred had I used a shorter look back period that would have led to exiting stocks near temporary lows and then reentering at higher prices. Not only would there have been more whipsaw losses then, but the losses would have been more extreme (absolute momentum with a 5-month look back gives the same -84% maximum drawdown as buy-and-hold). Your concern is understandable, but your logic is backwards. Slow moving trend following filters like 10 or 12-period absolute momentum are meant precisely to help keep one from getting whipsawed in and out of positions.

As it is now, your review reminds me of the story in my book about Andrew Lo. His research some years ago showed that tactical allocation and technical analysis definitely had some merit. One of Lo's colleagues with a strong prejudice against such things told Lo that his data must be wrong. It looks like your belief that slow moving trend following methods must inevitably lead to large whipsaw losses has you saying that 87 years without such losses isn't a long enough back test period because such losses haven't occurred during that amount of time. If reality doesn't confirm your beliefs, then reality must be wrong. Maybe you need to suspend your beliefs until you see how absolute momentum really works by testing it yourself and by reading the research papers on it that are referenced in my book.

I'm tempted to say that we should all stop racing to post our latest thoughts and instead take the time to digest (and let others digest) the lengthy posts that just keep coming, each of which requires (and deserves) a significant amount of mental unpacking, but I wouldn't be able to follow my own advice.

If stocks had underperformed treasuries for the last 800 years, do you really think that you would be 100% equities, because of your convincing story?

If government-guaranteed treasuries promised 20% yearly returns, I'm sure many of us would be 100% treasuries. Shoot, if they promised 7-8%, I'm sure many of us would be 100% treasuries. Indeed, back when interest rates were high, one of the first Extreme Early Retirement books recommended this.

But this is not related to the topic at hand, because it's a question of risk. If 100% treasuries guaranteed a 4%, or even a 6% withdrawal rate, why bother with anything else? Of course, the example is flawed, as if treasuries promised 8% or 20%, the stock market premium would naturally rise to be above that number and inflation would probably be out of control, but that's another topic.

Here are two relevant questions along these lines:

1. If the authors of these books/studies all admitted to a flaw in their calculations, published new books/papers saying they got the Dual Momentum effect completely backwards, and said you should follow the same steps, but BUY when you would normally SELL, and SELL when you would normally BUY, would you still follow the strategy?

2. If instead the authors could go back in time, and correct the mistake before publishing their first books/papers, with all the graphs, charts, and "performance chasing" justification looking exactly the same, do you think you'd still agree with the strategy?

You still have the 200 years of data, but now it says you should do the opposite. If you can admit to yourself that you'd still follow the strategy, then you're agreeing the "performance chasing" justification doesn't matter, and your analysis is solely reliant on the results of a backtest.

Dodge feel free to go back and read the context of my quote. You completely missed the point.

Here is my view in plain English: Reality (ie the past) matters. If a hypothetical reality was opposite to our current reality, then our conclusions in that reality would be different.

It's not a question of what authors say. It is a question of what the data says. Ie what actually happens.

My strategy would change with reality. I care about past performance and statistical examinations of robustness. You claim not to, (though I suspect you do.)

This aspect of the discussion goes back to whether or not only a priori theories provide an adequate foundation to rest an investment strategy upon, (independent of a posteriori investigation) an argument put forth by ARS, and you and others.

My stance is that of course a strategy should make sense, but what is most important is its future probability of working, which is best tested by its past, out of sample, and forward performance since its first description.

If stocks had underperformed treasuries for the last 800 years, do you really think that you would be 100% equities, because of your convincing story?

If government-guaranteed treasuries promised 20% yearly returns, I'm sure many of us would be 100% treasuries. Shoot, if they promised 7-8%, I'm sure many of us would be 100% treasuries. Indeed, back when interest rates were high, one of the first Extreme Early Retirement books recommended this.

But this is not related to the topic at hand, because it's a question of risk. If 100% treasuries guaranteed a 4%, or even a 6% withdrawal rate, why bother with anything else? Of course, the example is flawed, as if treasuries promised 8% or 20%, the stock market premium would naturally rise to be above that number and inflation would probably be out of control, but that's another topic.

Here are two relevant questions along these lines:

1. If the authors of these books/studies all admitted to a flaw in their calculations, published new books/papers saying they got the Dual Momentum effect completely backwards, and said you should follow the same steps, but BUY when you would normally SELL, and SELL when you would normally BUY, would you still follow the strategy?

2. If instead the authors could go back in time, and correct the mistake before publishing their first books/papers, with all the graphs, charts, and "performance chasing" justification looking exactly the same, do you think you'd still agree with the strategy?

You still have the 200 years of data, but now it says you should do the opposite. If you can admit to yourself that you'd still follow the strategy, then you're agreeing the "performance chasing" justification doesn't matter, and your analysis is solely reliant on the results of a backtest.

A Random Walk Down Wall Street has a relevant example. Take a large number of people, and ask them to flip a coin. If they flip heads they win, tails and they're eliminated from the game. After the first flip, about half the people will be eliminated. Then ask them to flip again, and again, and again. After 10 flips, only a select few people will be left. Are these people "lucky"? Are they "skilled". Would anything be gained by spending time studying their coin flipping strategy?

In other words, considering the large initial sample size, studying any one particular backtested strategy, and trying to peel out the "why" behind its results, is an effort in futility. As we can see here, the stated "why" (performance chasing) applies equally well to opposite actions. There's nothing left for me to discuss in this thread. Good luck!

To any newbies who got this far in the thread, this is your signal to move along, nothing to see here.

Logged

If you think you know something, find someone who disagrees and listen to them.

I'm tempted to say that we should all stop racing to post our latest thoughts and instead take the time to digest (and let others digest) the lengthy posts that just keep coming, each of which requires (and deserves) a significant amount of mental unpacking, but I wouldn't be able to follow my own advice.

We all just get caught up in the momentum.

Logged

We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.We (occasionally) blog at AdventuringAlong.com.You can also read my forum "Journal."

If stocks had underperformed treasuries for the last 800 years, do you really think that you would be 100% equities, because of your convincing story?

If government-guaranteed treasuries promised 20% yearly returns, I'm sure many of us would be 100% treasuries. Shoot, if they promised 7-8%, I'm sure many of us would be 100% treasuries. Indeed, back when interest rates were high, one of the first Extreme Early Retirement books recommended this.

But this is not related to the topic at hand, because it's a question of risk. If 100% treasuries guaranteed a 4%, or even a 6% withdrawal rate, why bother with anything else? Of course, the example is flawed, as if treasuries promised 8% or 20%, the stock market premium would naturally rise to be above that number and inflation would probably be out of control, but that's another topic.

Here are two relevant questions along these lines:

1. If the authors of these books/studies all admitted to a flaw in their calculations, published new books/papers saying they got the Dual Momentum effect completely backwards, and said you should follow the same steps, but BUY when you would normally SELL, and SELL when you would normally BUY, would you still follow the strategy?

2. If instead the authors could go back in time, and correct the mistake before publishing their first books/papers, with all the graphs, charts, and "performance chasing" justification looking exactly the same, do you think you'd still agree with the strategy?

You still have the 200 years of data, but now it says you should do the opposite. If you can admit to yourself that you'd still follow the strategy, then you're agreeing the "performance chasing" justification doesn't matter, and your analysis is solely reliant on the results of a backtest.

A Random Walk Down Wall Street has a relevant example. Take a large number of people, and ask them to flip a coin. If they flip heads they win, tails and they're eliminated from the game. After the first flip, about half the people will be eliminated. Then ask them to flip again, and again, and again. After 10 flips, only a select few people will be left. Are these people "lucky"? Are they "skilled". Would anything be gained by spending time studying their coin flipping strategy?

In other words, considering the large initial sample size, studying any one particular backtested strategy, and trying to peel out the "why" behind its results, is an effort in futility. As we can see here, the stated "why" (performance chasing) applies equally well to opposite actions. There's nothing left for me to discuss in this thread. Good luck!

To any newbies who got this far in the thread, this is your signal to move along, nothing to see here.

No offense but somehow I get the feeling you'll be back to argue some more.